Fundamental Accounting Principles CH9

Question 1

Receivable

Answer 1

an amount due from another party.
Most common:
Accounts receivable
Notes receivable

Question 2

Accounts receivable

Answer 2

amounts due from customers from credit sales

Question 3

Sales on Credit

Answer 3

credit sales are recorded by increasing (debiting) accounts receivable.

Question 4

BAd debts

Answer 4

uncollectible accounts from customers that are recorded as an expense.
2 methods:
1. direct write off method
2. allowance method

Question 5

Direct Write Off Method

Answer 5

records the loss from an uncollectible account receivable when it is determined to be uncollectible. Not attempt is made to predict bad debts expense.
Advantages:
Simple
No estimates needed
Disadvantages:
Receivables and income temporarily overstated
Bad debts expense often not matched with sales

Question 6

Allowance method

Answer 6

matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.
Two advantages over direct write off:
1. it records estimated bad debts expense in the period when the related sales are recorded
2. it reports accounts receivable on the balance sheet at the estimated amount to be collected.
Advantages:
Receivables fairly stated
Bad debts expense matched with sales
Writing off bad debt does not affect net receivable or income.
Disadvantages:
Estimates needed

Question 7

Realizable Value

Answer 7

is the amount expected to be received.

Question 8

aging of accounts receivable

Answer 8

also called a balance sheet method, is applied like the percent of receivables method except that several percentages are used to estimate the allowance. Each receivable is classified by how long it is past its due date.

Question 9

Debt balance

Answer 9

implies that write offs for that period exceed the total allowance.

Question 10

Promissory Note

Answer 10

written promise to pay a specified amount, usually with interest, either on demand or at a stated future.

Question 11

Maker of the note

Answer 11

the one who signed the note and promised to pay it

Question 12

Interest

Answer 12

the change for using the money until its due date
=Principal of the note X Annual interest rate X Time expressed in the fraction of year.
*When counting days omit the day a note is issued, but count the due date.

Question 13

Maturity date of a note

Answer 13

is the day the note must be repaid.

Question 14

Maturity Value

Answer 14

of a note equals principal plus interest earned.

Question 15

Selling Receivables

Answer 15

a company can sell its receivables to a finance company or bank.
*a seller always receives less cash than the amount of receivables sold due to factory fees.

Question 16

Disposal of receivables

Answer 16

Usually done by 1. selling them or 2. using them as security for a loan.

Question 17

Pledging Receivables

Answer 17

a company can borrow money by pledging its receivables as security for the loan.

Question 18

Accounts Receivable Turnover

Answer 18

helps access the quality and liquidity of receivables. measures how often, on average, receivables are collected during the period
= Net Sales/Average Accounts Receivable, Net

Question 19

Percent of Sales (bad debts)

Answer 19

uses a percent of credit sales for the period to estimate bad debts

Question 20

Percent of accounts receivable (bad debts)

Answer 20

uses a percent of accounts receivable to estimate bad debts

Question 21

Aging of accounts receivable (bad debts)

Answer 21

Applies several percentages to accounts receivable to estimate bad debts